Michaels Companies' (MIK) Presents at Goldman Sachs 23rd Global Annual Retailing Conference (Transcript)

| About: The Michaels (MIK)

The Michaels Companies, Inc. (NASDAQ:MIK)

Goldman Sachs 23rd Global Annual Retailing Conference

September 07, 2016 08:50 AM ET

Executives

Chuck Rubin - CEO

Denise Paulonis - CFO

Analysts

Matt Fassler - Goldman Sachs

Matt Fassler

Good morning, everyone. I’m Matt Fassler from Goldman Sachs and I have the pleasure today to introduce members of the management team of Michaels. Sitting directly to my right is Chuck Rubin, who’s the Chairman and CEO of the company, having joined Michaels in March of 2013. Prior to that, he spent three years as the CEO of Ulta, and prior to that had spent a number of years with Office Depot in a number of different capacities, including Chief Marketing Officer, Chief Merchandising Officer, and head of the North American retail business. He also spent time at Accenture and at Federated.

Sitting directly to his right, at what I think is her first conference appearance in this capacity, is Denise Paulonis, who just last month, a couple of weeks ago, was named Chief Financial Officer of the company, having joined Michaels in 2014. Prior to that she had been with Frito-Lay and also spent time at McKinsey. Michaels, as you know, is the nation’s leading specialty retailer of craft products. It’s had a terrific track record as a creative enterprise, which I think has been enhanced over the past several years under Chuck’s leadership, and a very, very steady track record of top-line and overall financial performance.

So I’d like to start off by talking a bit about the here and now, and I think that will come up a lot over the course of this conversation. So in the course of a mix retailing environment, in the second quarter, your company retained its traffic. Your traffic I believe continued to grow a little bit. How are you making that happen?

Chuck Rubin

Well, we’ve been -- first of all good morning. Thank you for having us here. And this is Denise’s first conference leading the finance group. Over the past several quarters, we’ve actually had positive transactions. Our business is interesting in that, we have a business that is based on want. We don’t sell things that customers necessarily need, we sell things the customers want. And we’ve done a very good job of trying to make upgrades to our stores, make upgrades to our merchandise, as well as to our marketing. We also have the good fortune of dealing in a product that is not very e-commerce friendly, it’s a very tactile product, because we sell a lot of components that people mix and match to create the end product.

So for instance, they want to come into a store to see the paper and the ribbon and the paint that they’re mixing together to create something, and that tactile nature drives them to the store. Being the biggest in the industry, we’ve been able to leverage a lot of our strengths, which is core to our Vision 2020 strategy. And through all those efforts upgrades of our stores, the merchandise as I said as well as I said the marketing. We think that has led to higher transactions, which is what we saw even in the Q2.

Matt Fassler

So if you think about the totality of traffic, ticket, category trends, what do they tell you about the backdrop that we are in?

Chuck Rubin

The backdrop on the consumer?

Matt Fassler

The backdrop of the consumer, the backdrop of retail, backdrop in your category, and all of them.

Chuck Rubin

We’re the only public retailer in our industry, so it’s hard to get very solid data on the industry in general. Although, our acquisition earlier this year of a company called Lamrite West, which is the biggest wholesaler into this industry, does give us a unique perspective. Clearly what we see is an industry that is going through some choppiness, just like most of retail. Exactly what’s happening with the consumers, quits honestly, we haven’t figured out and we haven’t spoken to anybody that has figured it out. What we have seen is transactions have been good as we just touched on, but in our business she seems to have a fixed amount of money that she wants to spend, she may come more frequently but on each visits she's spending consistent with what she did before.

We also have the largest custom framed business in the world in fact we're vertical. We manufacture most of custom frames that we create and sell to customers that's our version of luxury business, so our average transaction is about $20. A custom frame transaction is in the 160 to 170 range and we've seen that one go through some choppiness as well with the luxury markets slowing down.

With all of that said given that unique perspective that we have with our Lamrite purchase, we do believe we continue to gain share on the market. So our total shares grew obviously faster than our comps, so we feel good about what we're doing, we've delivered good results over the past numbers of year, we continue to build upon that. But there is a malaise that is evident in what the consumer is doing.

In our case we do think it's somewhat related to when there is a natural driver she shops, when there isn't, it's harder to get her in. Part of the reason we feel better about our comps in the back half of this year is, we're a especially strong seasonal player and that with know Christmas is coming and Halloween is coming and we think that will be part of the motivation for her to come back out shopping.

Matt Fassler

Would you say that you've gotten bigger in seasonal and more focused in seasonal over the past couple of years, that has been the case prior?

Chuck Rubin

I would say that we've gotten better at being trend right. So there is a trend component of this business whether that's collar, whether that's texture and in an interesting kind of way it's not -- it doesn't increase the liability of our inventory because it's still a lot of core product that it's putting it together in certain ways that show a customer how to be trendy. In our store, we carryover 50,000 skews, so there is a way of showing how to use those products in a more trend right area.

I'd say that first seasonal is a part of that because there is a lot of trend in seasonal, so yes seasonal has become a bigger portion of our business, especially in the back half of the year. It is an area that we do compete with a broader set of competitors on the back half of the year in the seasonal business, but you also attack a much broader set of customers as well. Our efforts and our believe in the back half of this year is based on our success the past couple of years of doing exactly that, this year we have a couple of things that built on top of successes we've had in the past that gives us confidence in our plan.

Matt Fassler

How are impulse items doing, if you can segment them out? And I know so much of your stores as impulse given the ticket. And we've been focused on that as we're seeing fewer trips across retail given traction in online. I know your traffic is fine, but if you think about impulse items as opposed to destination items for your business?

Chuck Rubin

You know, you could argue that a lot of our product is impulse oriented because they’re pieces and parts, and there is no finite way of defining what is needed to make an end product. As I mentioned before what we're seeing is she has -- most of our customers are women, she has it appears a fixed amount of money that she is willing to spend on any visits. So when we have impulse items.

I'll give an example, today we have emoji pillows, which I think sell for $8 selling incredibly well. But it appears as though while she is buying those, she may not be buying something else because the average ticket is still about the same or she's coming back more frequently and hence the higher traffic that we have, the higher transactions that we're seeing. So good on impulse, bad on shifting that cap on the spending.

Matt Fassler

Now if you think about the framing business on other competitive factors that could be a play and is there anything you can do, whether it’s a value statement or any other changes that could help turn that business around despite some macro headwinds?

Chuck Rubin

No, I don’t think there is any competitor issues. We are by far the biggest in the world on custom frame. Both at the Michaels chain, but we also have a smaller specially chain called Aaron Brothers and now Pat Catan's, which is a retail chain that was part of the Lamrite family that we acquired.

So we see custom frame from lots of different angles and we are firmly convinced that the industry is just going through some choppiness. Are there things that we can do, by all means. You know custom frame like any custom product is expensive, by definition, you can make it as expensive or as inexpensive as you want, but it is a more expensive purchase than just off the shelf framings.

We have highlighted and in fact I think this past week we even highlighted a more value based price in custom frame. And as we go through the back half of the year we’ll continue to talk about the unique capabilities we have in custom frames, as well as you will see a greater focus on more value oriented pricing, not exclusively on that, but a greater focus then historically we’ve had.

Matt Fassler

Thank you. I want to talk for a minute about private label and this is the first time we’ve sat down in this forums since you did the Lamrite deal, which is sort of a whole topic in its own right. If we could start for the movement talking about the private label and exclusive opportunities that are generated on that transaction.

Chuck Rubin

So a few things, just by way of history. So Michaels had almost no private brand back in 2006-2007. We they started down this initiative to develop private brand skill sets. Today we’re a little bit over 50% private brand in terms of what we sell. We believe that can go higher. I think we’ve said publically that this could go into the 60% may be a bit that higher range. This as an industry has very few national brands. It make its very unique, it also makes it very defensible compared to other industries to the Amazons of the world. In fact our private brands just as point of reference within the classifications of product that they operate in are almost always the number one volume brand across the industry for that classification of product.

So to your question. So A, yes we believe that we can still continue to go a bit higher in terms of penetration. But what Lamrite also provided to us, in addition to some additional product development skills was a China sourcing office prior to our acquisitions Michaels sourced all of our products, almost all of our product through third party agents. Through the acquisition of Lamrite, they had a preexisting China sourcing office. We have taken that office, we’ll now added a second office and we have scaled the people up in China and they have already started to handle a good part of the Michaels volume through that China office, and that will continue to grow. The goodness on that is that we have seen thus far as some tax benefits to it, to us and we believe we’ve made a structural change to our tax structure. But we also have greater control over the full range of product development and sourcing than we had before.

The other final point, that I would call out, that we’ve discussed in prior meetings and this is somewhat independent of Lamrite, although Lamrite is part of our equation, is that Michaels had kicked off a new approach of negotiating with manufacturers, with factories on private brand product. So the way that we explain it in just very simple terms is, we were always very good at taking a product and putting it out to bid to different manufacturers and letting them bid against each other. What we have added over the past number of quarters and especially this year is a capability where we're now actually decomposing the product that we're putting out to bid. So we actually look at the product cost, the component cost of that product.

So increasingly when we go into a negotiation with a factory we're going in with an understanding of what we think the price should be, and that additional layer of knowledge which then goes out to a bid between different factories is allowing us to find some real incremental savings and those savings we’ve said will start to flow through our inventory later this year but especially into 2017.

So a bit of a long winded answer to your question Matt, but we remain really excited about what we've accomplished in private brand, but what we still can accomplish as we go forward.

Matt Fassler

So it sounds like this is going to be more about lowering the cost base and to some degree driving quality than it will be about taking that number from you know 60 to 70 over time.

Chuck Rubin

It's going to be an opportunity for both. Remember we're just over 50% today. So we've literally gone from almost zero to I think it's 54% today in 10 years. 54 will not become 95, but the 54 can go higher. So they are two very good opportunities that run in parallel.

Matt Fassler

How do we frame the margin opportunity on that 50%, so if you're 50 today headed to 60, of that 50 what proportion do you have the potential to reorient to your own sourcing office from agents or from other geographies to China where it seems like you now have more focus buying clout.

Chuck Rubin

Most of what we do will run through our sourcing office in some way. So we'll still continue to use agents. There is a purpose for them, so what we call it is a hybrid model. We'll source a lot of it ourselves, we'll use the agent for some parts. And there're specific reasons why. But even on the product that an agent sources for us there are still services to support that product that will run through our own China operations.

So most of what we take in in private brand which is not quite but almost a billion dollars of first class will run through in some form our China office. Now I would caution that we've had investors look at us and say well you're going to save all that money from the agent. That is true for the product that we take in housing and studies the agent, but now we're incurring a cost of our own people in our own offices and all the G&A that goes with that. So with all of that said and done it's still a very attractive opportunity for us both from a cost stand point as well as a control standpoint for us to continue down that path.

Matt Fassler

So once you netted out, you've got your upfront costs, you sell through the old inventory at lower cost -- at higher cost of goods, you get to the penetration that you hope to get to for your own hands on negotiations through the hybrid model retaining some agency business, when all is said and done what can the margins do as a result of this move?

Chuck Rubin

It provides us a lot of goodness. We have been asked, of all these efforts how many dollars are we talking about. We haven't answered the question and we will give some further direction on that not today but in the future. The reason we haven't answered the question is the following, A, we have quantified what the value of these efforts are. So we know that dollar figure. What we’re still in the process of working through is how do we take -- what do we do with those savings. So we have three years ago kicked off our Vision 2020 strategy, which essentially is built on five key pillars. One of those pillars, we call fuel for growth. It’s been a very successful effort in the company where we have touched simple things and we’ve touched harder things and we’ve tried to do them faster, smarter, cheaper to save some money. Some of that money we have taken to the bottom-line, other parts of the money, we reinvested into the company.

So this sourcing effort, with the value that we’re going to create there, we’re still in the process of determining how much of that is going to be reinvested into our future, strategic efforts and how much of it will go back to the bottom-line right away. As we finish that process we’ll come back out and talk to investors about them.

Matt Fassler

That leads me to segue to a question I was originally going to ask you later in our discussion. But it does relate to your operating margin. Your operating margins have risen for years. They’re among the higher margins in the companies I cover and margins can be misleading, but if look at it equalized, which is return on capital, your returns on capital are also quite attractive, which is to say you’re earning a very healthy return

How much of what you’re talking there in terms of what to do with the savings captured through Lamrite or through sourcing in general, is an acknowledgement, that hey we make great money, we want to be thoughtful about how high that goes. Or do you feel like your margins can go higher without putting yourselves at risk competitively? Because that would be the only reason to hold back from what could be higher profitability.

Chuck Rubin

I think that the consumer -- we’re the biggest and obviously we believe we’re the best. We’re factually the biggest and our strong opinion is we’re the best in this industry. So but with that said, it’s a very fragmented industry. Even though we’re the biggest we only have low-double-digit percent of the market that’s out there. So we still think we can gaining more share and the consumer continues to want more. So you have to continue to invest in the company. We have to continue to invest in our stores and our people and in our marketing, so those things will continue.

So can our operating income go up? From a dollar standpoint without a doubt. From a rate standpoint, recognizing some of what I just said and the fact that Lamrite West, because the bigger part of that business is a wholesale business, which runs at a lower rate than retail. The rate we’ll shed more light on, but we’re not -- our focus is not to inflate the rate to a point where we are depriving the investments we need in the company.

Matt Fassler

Seven or eight months past the deal, what have you found in terms of wholesale customer retention? There was obviously nominally risk of channel conflict. You clearly got comfortable with that when you did the deal. But now you have some reality under your belts. People know who their vendor is, who their partner is. What are you seeing?

Chuck Rubin

Yes. So just to give the context around. So Michaels was the second biggest customer to Darice, which is the wholesale arm of Lamrite West. The biggest customer was Jo-Ann’s. At the same time, they sold pretty much everybody in the industry from Hobby Lobby to the discounters, Walmart, Target, et cetera. Since our acquisition I am unaware of any customer that we have lost, I’m sure that some small mom and pop probably dropped out, but I’m unaware of that. And clearly of any customer of magnitude, we’ve not lost anybody, not a single one. In fact, we’ve gaining customers.

With that said, I commented before, owing them gives us insight to this industry. This industry like most of retail is going through some through choppy sales. So we've seen some ups and downs in our sales from some of those customers, but we believe that’s based on consumer not based on their decision to retract from our business.

Matt Fassler

I want to talk for a moment about real estate which is one of the big names we're looking at, at this conference. The kinds of site that you typically have occupied seems like it's fairly stable. I know you have some office stores that are closing and that seems to be the biggest change, but the in-line 10,000 to 30,000 square foot box per se is in reasonably good shape compare to say the department stores, the malls which are experiencing much more disruption, how are you thinking about the most of attractive real estate opportunities, what's your mall exposure like, are you looking to downsize it, get bigger, it at all?

Denise Paulonis

So we have very little mall exposure, so we just started there as a premise. We look for big box space in its own center, typically A and B real estate. We have a set of peers that we like to be close to. I don’t think anything about that model is changing for us and I think as you said, it's a pretty stable space that we can be in, so I think we feel good about that. And clearly there is a little bit of opportunity that could be there when you think about some businesses going out of business and what could be presented.

But when you think about Michaels as a chain overall, we have over 1,200 stores today. I think our real estate strategy is much more focused on where is the right places to go based upon where demographics are going, where fill-in is going, about future potential for growth. When you think about the other side and say well, is there any where that you would close, the reality is that well over 95% of our stores are four-wall EBITDA profitable. So we're not in a place today where we'd be saying what might be pressuring people in malls or in other environments like that, it's not the place that we're today with real estate.

Chuck Rubin

Let me just add a little bit to it. I think right before us, you had Ulta, so my former company. Very few retailers are very attractive to landlords today. They like retailers who drive traffic to their center, clearly Ulta was one and Michaels because of our transactions is another. But to think about this way, in rough math our average store is $4 million of revenue at $20 a transactions. So there is a heck of a lot of people that come to our store and that magnet for traffic is attractive a landlord.

That's the good news. The bad news is the real estate market doesn't have the level of building that was happening years ago and therefore the leverage point on the retailers side is more diminished than it used to be years ago. But I would contend that we're still one of the more attractive retailers because of the traffic that we drive to the center, people like to be with us, we're quite often the co-tenant that’s named for other retailers and that gives us to the degree you can have in this kind of supply and demand environment of real estate. It gives us a little bit more leverage on the landlord.

Matt Fassler

Online, so you have probably more than any company downplayed, if you will, the impact that online is likely to have on your business and you've modulated your investment consistent with that view, what is working online in your categories for you and for others if you see anything to marketplace?

Chuck Rubin

So, online, let’s separate online into two-part, and our belief today is consistent with our belief has been over the past few years. So digital communication is incredibly impactful in this business.

So social media, bloggers, online everything is to influence a customer is terrific. If Pinterest didn't exist, then we would have had to go out and invent it, because that is a big motivator for customers, especially what we call a novice customer. The customer who has desire to make something but lacks some knowledge of how to do it. That’s a very sweet spot for us to cater to and we’ve done a lot of work and still have a lot of opportunities to capture more of those customers.

The second part of the digital world is e-commerce. Michaels two years ago -- little over two years ago had a very highly trafficked website, but we didn’t sell anything. We did not have ecommerce setup as a capability. So we did it two years ago, little over two years ago, we’re two years in. Our view point then is consistent with what we’ve seen and consistent with what we believe now, which is ecommerce is an attractive bolt-on to what we do, but it’s not a game changer like it is in almost any other industry. And industries that have already experienced it like consumer electronics or office products or books or industries that may still see it to come, whether that’s cosmetics or apparel or others.

Our industry is somewhat insulated due to the dynamic, the average price point of an item that we sell is $3. It is a heavily unbranded business, or in our case private branded business. It is a very tactile industry. It is a very big SKU base business, long tail, over 50,000 SKUs in our store and then we have stores that carry more than that. So all those make it not well suited for double digit penetration for ecommerce. With all of that said, we’ve said before that we think it can grow to be in the mid single digit for us, today it’s now where near that, but today we’re a $5 billion Company, mid-single digit penetration it’s still a $250 million to $300 million business.

Lamrite West and their Darice wholesale business, adds an additional opportunity for us from a B2B play, but even with that, we still think this is a nice amount of business, we’re aggressively pursuing it, but we think overtime, its $300 million to $400 million of business, over time. But it’s not the game changer. So what’s working, we do see certain categories frames does better, big SKU assortments are what’s selling better online and we do see opportunities both again on the B2B play, where we consult to small customers, mom and pops, where we can sale internationally leveraging our Darice platform. We think ecommerce will help with that.

Matt Fassler

Great. There are four questions we're asking every company at the conference. I'm going to ask Michaels. Then we have the opportunity to open it up to the audience. And I have some additional question on my core list to get to. The first of these questions is, you’re expectations for the environment in the second half of 2016 relative to your second quarter results, better or worse or in-line?

Chuck Rubin

Better, we believe they’re better because -- although we did make them -- we took down our top line expectations. So they were a bit more conservative than they were originally. Although we still believe due to our structural changes and our tax planning as well as some share buybacks that we've had, that our EPS was constant. Actually, I think we brought up to bottom end of the range $0.01.

Top-line, we believe it gets better in the back half for the year for variety of reasons. One, we’re playing more to the sweetness of our business and to the seasonal part of our business, where we’ve done very, very well in the past number of years. Two, we’ve taken about 30% of our Michaels chain and made a change in our physical environment in the store, where we've set up a seasonal pad in the front of the store which reflects some learnings that we've gained through a bunch of store resets over the past few years. So we're very excited about presenting that newness to the customer as she walks in the door.

Three, we are going to step up our marketing especially in the fourth quarter. This is a promotional business and we too are promotional, however we believe that in addition to discount there is an opportunity to market more aggressively and we will do that. Fourth our assortment that we are putting out especially around the seasonal businesses we believe is the biggest and the best that we've ever delivered. Fifth we also have learned some things through earlier resets and stores that we've done, as well as going through the holiday season where we will be providing some incremental training to our own teams so they're well suited to help those customers that we see only once a year at the seasonal timeframe, we’ll be in a very good position to help them.

So with all of that said and done we do think our comps get somewhat better in the back half.

Matt Fassler

That's helpful. Second question, I know that your ecommerce business is small as we just discussed. How do your omni-channel margins compare to your store based margins at this point?

Denise Paulonis

With being the only public company in this industry it's not a number that we’ve shared. So I don't think that we're going to share any specific number today. I would say that we continue to improve over time, as we gotten scale and a little bit more leverage in that portion of the business we've seen benefits come through there for us. We've also seen it in selling a different mix of products where we use inner [ph] packs, where we had different go to market methods, where we ship from DC as well as shipping from our fulfillment center, as those things continue to improve that margin perspective.

Chuck Rubin

And just to add, again, you know the -- today, just to reinforce this. Everybody lives in fear that ecommerce is going to displace brick and mortar, that is not what we see. We do see an interesting opportunity for ecommerce, which is an add-on to what we do. It doesn’t change the game, it just is another layer to add to it. But today, part of the reason it doesn't have a big impact on our business is it's still small. It's growing very quickly on a percentage basis, but the dollars are still small.

Matt Fassler

A third question, wage inflation. Is this a net positive or net negative for your business today? And thinking about next year '17 versus this year '16 will it be a bigger deal or less so?

Denise Paulonis

So it's certainly, it's putting pressure on our SG&A. I would say right now we're characterizing 2016 and 2017 as relatively consistent in terms of the pressure we see, where we look at the business today we think we're very attractive employer. So most people who come to work for us a lot of them like to craft and a lot of them like the hobby industry and we offer very attractive employee discounts. Generally, speaking our average hourly pay is also well above federal minimum standards. So when we're looking at the pressure we're seeing, it's more the rising tide of what might be happening on a state by state basis that we're responding to, and we do look at that on a market by market situation.

Matt Fassler

Is it -- Denise, to follow up, is it minimum wage driven typically or is it more competitively driven?

Denise Paulonis

Right now, it's still more minimum wage driven. There might be small pockets in the country where it's a bit more competitive driven, but those would be isolated.

Matt Fassler

And then inventory growth, would you expect inventories to -- the relation of inventories to sales to move higher, lower or stay constant over the next year?

Denise Paulonis

I would say generally consistent. So what's little unique for us this year that you will see is that in 2015 we're all recovering from the West Coast port slowdown, and so the flow of inventory really changed for us and we purposely brought in inventory earlier in the season to make sure that we were well stocked for Q3 and Q4 which are our biggest quarters of the year. This year we're back to a bit of a normalized inventory flow. So while we expect the end of the year to be fairly consistent with where we ended last year, the quarter-by-quarter variation will be a little bit more unique.

Matt Fassler

I have some additional questions, but I want to get people in the audience a chance. Good we have two people, upfront three people. So start right now in the middle move up and try to hit everyone.

Question-and-Answer Session

Q - Unidentified Analyst

Thank you. Any potential impacts or comments regarding Hanjin?

Chuck Rubin

Yes. Two parts to the answer, we do not carry a lot of freight on them. So from a freight standpoint, it’s immaterial. We have a bit of inventory, but very little. The other part of the issue is, earlier this year there was more supply than there was demand. So we were able to negotiate some attractive rates on the freight that we were moving across carriers. So the impact of this on those rates still something to be determined. We think it’s a minimal impact as well to us, but there is still a little bit of work to be done on that.

Matt Fassler

We have some upfront?

Unidentified Analyst

Can you talk a little bit more about the retail component of Lamrite West and sort of where you see that fitting in the overall scheme, particularly in markets where you’re going head-to-head with Michaels?

Chuck Rubin

Yes. So Lamrite West has two arms. One is Darice, the wholesale arm, and the second is Pat Catan, which is a retail store. When we acquired the company they had just over 30 stores. We’ve since opened a couple of store, so we’re sitting I think at 34 stores. Their average store is somewhat different than Michaels. They’re bigger, on average about twice the size of Michaels. Michaels is 20,000 feet, their stores is 35,000 to 40,000 feet. They are more of a value based arts and crafts retailer.

So we’re going through some process now of determining -- and they also operate in typically more secondary real estate, second and third tier real estate versus A real estate where Michaels is. So we’re going through a process on that, we do believe there is a potential for some expansion with them, we’re very cautious of managing the cannibalization on Michaels, so it’s going to be a net positive economically for the company.

Unidentified Analyst

I had a question really about branding and one about the competitive -- one of your competitors. Can you share where your unaided awareness is and how that compares to Hobby Lobby? And then I’d also like to hear characterization of the Hobby Lobby offering and where it fits relative for a customer versus your store.

Chuck Rubin

The last part, on what was the customer?

Unidentified Analyst

Who is the Hobby Lobby customers versus the Michaels customer? Are they the exact same people or how/what’s their differences that you would call out?

Chuck Rubin

Yes. So I’ll preface the comment by saying, firstly we’re the only public retailer in this industry as I mentioned before. So we’re a little reticent to tell every detail. Our unaided awareness, I don’t know if we’ve said that publicly and I’m reluctant to get into that. I will tell you it is by far better than anyone in this industry, so we’re very pleased with that. Your question about Hobby Lobby, Hobby Lobby is a family-owned company. I believe they always will be family-owned. I personally believe they are very good retailers. Operationally they very, very good. Their stores are different than ours, their stores are big 40,000 to 50,000 feet.

Historically, they’ve been in secondary real estate as well. They are a big home decor store, as well as a fabric store and an arts and craft store. So I think customers and this is based on research as well. Customers when asked about their competitors, they name goods as often as they name anyone else, so they have a big orientation and again fabric as well where Michaels doesn't play today. So very-very good retailer, a very traditional retailer in every sense of the word they are a bit old fashioned, their systems are bit old fashioned, their marketing is very traditional. Their offering is not trend based at all. They are very core in what they do. Operationally and how they run their stores, they're very-very good.

With that said, they're very good, but competition is good, we do see them as a very competitor, but as you would probably expect me to say we certainly are not frightened of them, but we do have a good respect for them.

Matt Fassler

We have time for one last question right there.

Unidentified Analyst

You're fairly optimistic about second half, but your peers -- one of your peers in particular has been ceding share, comps have been negative. They're obviously trying to set the bar higher and build their business in second half of 2017. How are you going to address that in terms of their initiatives to build up more of their crafting business and go after you core?

Chuck Rubin

Which peer are you talking?

Unidentified Analyst

Jo-Ann stores.

Chuck Rubin

Jo-Ann is 50% fabric of the other 50% about two-thirds of that is craft and the third of it is seasonal. They are a different players than more of convenience players. They have been incredibly promotional. We will complete very well. We'll continue to do well against them based on bigger and better assortments and bigger and better marketing, and we think a bigger and better experience in the store. So we feel good about where we are. To your question, the things that we can control in the back half of this year we feel good about. Our biggest concern that keeps us awake at night is just the consumer malaise that seems to be out there in general.

Matt Fassler

Okay two announcements. First of all, I negated at the outside of the days to talk about our emerging brands track in the second half of the day with eight private companies in this champagne suite. You should look at your schedule and just be aware of that. Secondly, next up, in this room we will have the GAP. Upstairs, we'll have [technical difficulty] and then sequential brand in the champagne suite.

Please join me in thanking the management of Michaels for their remarks.

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